Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Economic activity continued the recovery initiated in late 1996, and real GDP growth
accelerated to 3.8 percent in 1997 from 2 percent in 1996 led mainly by a strong rebound in
exports and continued growth of the financial sector, while activity in the construction sector
expanded on account of low income housing. At the same time, inflation declined to 1.9 percent
during 1997 from 7.4 percent a year earlier helped by a prudent monetary policy, falling
international prices of oil and cereals, and the appreciation of the dollar to which the
colón is pegged. The external current account position continued to strengthen in 1997 as
coffee exports grew by about 50 percent (26 percent increase in prices and 18 percent in volume).
Also, nontraditional exports grew by 20 percent (5 percent in 1996) reflecting both a recovery of
the Central American market and penetration of new markets niches. The sharp deceleration of
inflation during 1997 to below that of the trading partners for the first time in the 1990s
contributed to slow down the real effective appreciation of the colón stemming from the
appreciation of the U.S. dollar.

The fiscal position also improved in 1997, with the overall public sector deficit (before
grants) declining to 2 percent of GDP from 2.6 percent the previous year. The public finances
were affected negatively in 1997 by a significant shortfall in tax revenue despite further efforts in
tax administration. In response, the authorities took steps to enhance VAT collections, cut public
expenditure, including by maintaining the freeze on public sector wages for the second
consecutive year and postponing transfers and capital outlays to 1998, and tightened monetary
policy.

The financial system was affected by the spillover from the collapse in July 1997 of two
small financial institutions. To bolster confidence, and also to sterilize the increase in foreign
exchange reserves, the central bank contained the reduction in the interest rates to significantly
less than the drop in inflation. At the same time, however, growth of credit to the private sector
accelerated during 1997 (to 15.5 percent in real terms from 7.6 percent during 1996), while broad
money expanded in real terms at a somewhat faster pace than in 1996.

Progress was made in 1997 on structural reforms, including the modernization of the public
sector, reduction of import duties, environmental policy, and an innovative community-managed
school program. Also, the superintendency of pensions became operative in June 1997, with
private managers of individual accounts expected to start operations by June 1998. Four
electricity distribution companies were privatized in January 1998, and the privatization of the
telephone company is underway with the sale to be completed by June 1998.

Executive Board Assessment

Executive Directors were in agreement with the thrust of the staff appraisal. They noted that
in 1997 the pace of economic activity accelerated significantly, inflation fell below that of trading
partners, and the external current account strengthened further, mainly owing to a sharp recovery
of nontraditional exports and maquila, and a large gain in the terms of trade on account of coffee
prices. However, the fiscal position improved less than had been envisaged in the program
mainly because of a shortfall in tax revenues. Moreover, the structural reform process slowed
down, reflecting delays in the privatization of the telephone company (ANTEL) and in the
implementation of the pension reform.

Directors welcomed the authorities’ prompt and decisive response to the shortfalls in
revenue in 1997 by curtailing and postponing expenditure, and tightening monetary policy. These
actions were particularly commendable, given the political pressures faced by the government to
loosen policies before and following the elections, and in view of the difficulties experienced by
the financial system. Directors welcomed the authorities’ intention to maintain financial
discipline, and they supported the request for the extension and rephasing of the Stand-By
Arrangement to May 30, 1998.

Directors underscored the need to keep public finances under control in 1998, while
maintaining a monetary policy that would slow the rapid credit expansion to the private
sector.Directors welcomed the authorities’ efforts to improve tax collections and their
commitment to tighten fiscal targets under the program if additional revenues were to
materialize. The need to address the issue of declining tax revenues stemming from the reduction
in import duties with a view to achieving a sustainable fiscal position over the medium term was
also underscored by Directors.

Directors welcomed the resumption of privatization of public utilities, which will contribute
to increasing productivity and strengthening external competitiveness, while increasing the
country’s exposure to investment opportunities by foreign investors. Directors noted that
pressures to spend a larger portion of the privatization proceeds than envisaged in the program
for 1998 should be resisted so as not to put pressure on domestic prices; this is essential to
preventing a further loss of competitiveness and, consequently, to sustaining higher rates of
growth. In this context, they supported the authorities’ decision to use a large part of the
larger-than-expected proceeds from the sale of the electricity distribution companies to repay the
outstanding external short-term debt, and to create a special investment fund with the remainder
of the proceeds, including from the sale of ANTEL, to finance investment outlays over a
three-year period.

Directors welcomed the authorities’ initiative to strengthen banking supervision, and
welcomed the decision to improve the operation of indirect instruments of monetary control.

While Directors noted that the exchange rate peg had supported the authorities’
stabilization efforts, they emphasized the importance of monitoring closely the impact of the
exchange rate on the external position.

It is expected that the next Article IV consultation with El Salvador will be held on the
standard 12-month cycle.

El Salvador: Selected Economic Indicators

1994

1995

1996

Prel.1997

Prog.1998

(Annual percentage changes; unless otherwise
specified)

Output and prices

Real GDP

6.0

6.3

2.1

3.8

4.0

Consumer prices
(end-of-period)

8.9

11.4

7.4

1.9

3.5

Unemployment rate (in
percent of the labor force)

7.7

7.7

7.7

7.8

...

Real effective exchange
rate (depreciation -)

1.7

7.7

5.0

4.5

...

Interest rate (180-day
deposits, in percent)

13.0

16.4

12.0

12.7

...

Money and credit1

Net domestic assets of
the financial system

17.5

16.5

14.4

8.0

3.4

Credit to the private
sector

16.3

23.3

13.1

15.5

10.9

Liabilities to the private sector

18.3

12.7

17.3

12.3

12.3

(In percent of GDP; unless otherwise specified)

Nonfinancial public sector

Nonfinancial public
sector balance after grants (deficit -)

-0.6

-0.1

-2.4

-1.8

-3.0

Central
government

-0.8

-0.5

-2.0

-1.2

-2.2

Public
enterprises

-0.1

0.0

-0.6

-0.8

-0.7

Social Security
Agency

0.3

0.3

0.2

0.1

0.1

Savings and investment

Gross domestic investment

19.8

20.3

16.2

16.2

17.3

Private sector

15.8

15.0

12.3

12.6

13.2

Public sector

4.0

5.3

3.9

3.6

4.1

Gross national savings

16.1

15.5

14.0

15.1

15.1

Private sector

14.1

12.3

12.2

13.5

13.9

Public sector

2.0

3.2

1.8

1.6

1.2

External current account
before grants (deficit -)

-3.7

-4.8

-2.2

-1.1

-2.2

External sector

Overall balance of
payments (in millions of U.S. dollars)

143

147

165

362

410

Gross international
reserves (in millions of U.S. dollars)

788

935

1,099

1,461

1,871

(in months of
imports)

4.2

3.9

4.9

5.9

7.0

External public
debt

25.6

23.7

24.4

24.4

20.9

Sources: Ministry of Finance; Central Reserve Bank; and IMF staff estimates and
projections.
1In
relation to liabilities of the financial system to the private sector at
the beginning of the period.

1Under Article IV of the IMF's Articles of Agreement, the
IMF holds bilateral discussions with members, usually every year. A staff team visits the country,
collects economic and financial information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff prepares a report, which forms the
basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing
Director, as Chairman of the Board, summarizes the views of directors, and this summary is
transmitted to the country's authorities. In this PIN, the main features of the Board's discussion
are described.